Tue, Dec 6, 2016 | updated 11:26 PM IST

China targetting Sri Lanka's cement sector in wake of Holcim's impending exit

Updated: Jul 08, 2016 17:05 IST

Colombo (Sri Lanka), July 8 (ANI): The cement market in Sri Lanka appears to be heading for an irreversible change in the wake of speculation that China is making a strong bid to enter it, following last month's announcement by multinational cement producer LafargeHolcim to sell its subsidiary Holcim Lanka Ltd.

According to reports, a Chinese bidder has taken note of the Sri Lankan Industry and Commerce Ministry's expression of interest to buy out Holcim Lanka Ltd., and reportedly is ready to offer USD 500 million, a whopping 100 percent more than Holcim Lanka's USD 250 million value.

With a total cement manufacturing and bagging capacity of around 3.9 million tons per annum (MTPA) and being the only integrated cement plant in Sri Lanka with access to captive limestone mines, Holcim Lanka Ltd. has always been an attractive strategic buy.

Sri Lanka has an overall market of around 6.5 MTPA, while China has a 474 MTPA capacity and a keen desire to export its cement.

With cement being one of the key industries for a growing country like Sri Lanka, it does not come as a surprise that Colombo is being careful about giving the green signal to Beijing to establish its presence in this sector, given that the latter has a reputation and a national strategy of "dumping" exportable products at prices that are way below what they are sold in the domestic space, or below its cost of production.

China also has acquired a reputation for capturing markets and then destroying competition. So, therefore, the Government of Sri Lanka would be assessing the short and long-term effects of it entering the cement sector.

In theory though, China could consider importing large quantities of clinkers (stony residue from burnt coal or from a furnace) using the three key port terminals of Colombo, Galle and Trincomalee, instead of manufacturing cement at Holcim Lanka's integrated Puttalam plant.

Should China be given permission, in the short term with a well funded loss plan, it will flood the market with low priced cement, while in the long term, it could eliminate competitors. Once a monopoly situation is reached, Beijing could then be in a position to dictate prices, and price controls imposed by Colombo may effectively have no meaning.

A second concern for Sri Lanka that it would have to consider is the drastic cut down in employment not only at Holcim Lanka which employs directly or indirectly 1000 Sri Lankans, but across the industry with its competitors closing down.

A third concern is the fact that Sri Lanka has no anti-dumping laws to protect local industry.

Potential buyers of Holcim Lanka are reportedly also anxious about the firm suppressing important information.

Earlier this year, Sri Lanka's Commerce Secretary T.M.K.B. Tennakoon wrote to the company's Chief Executive Officer Holcim Bernard Fontana and drew his attention to the fact that the government is not making a profit out of the lease agreement entered into in August 1993.

Under that agreement, Holcim was given the right to extract from 5,141 acres of cement quarry land in Aruwakkalu, Puttalam.

The commerce secretary said then that the only revenue being received was in the form of lease rental and a royalty payment to the Geological Survey and Mines Bureau (GSMB). It was also pointed out to Holcim that it was behind on rent payment, which was unacceptable when the firm is making huge profits.

Holcim invested USD 26 million as part of the 1993 agreement which gave the company the right to extract limestone for 50 years. The ministry claims that Holcim has extracted nearly 4000 metric tons of limestone, the value of which is in the region of Rs. 48 billion.

Holcim has enjoyed a 12-year tax holiday from funds borrowed from within Sri Lanka, the commerce ministry has claimed, according to a report appearing in Sri Lanka's Daily News.

Sri Lanka, therefore, needs to be protective about its local industry, especially against China.

The Chinese already have access to the Colombo and Hambantota Ports, and giving them further access to the ports of Trincomalee and Galle may raise concerns. Allowing Beijing to get a foothold in the country with no conceivable benefits to Colombo, could raise political eyebrows.

Financial experts in Sri Lanka have warned that more than a third of Sri Lanka's revenue goes toward servicing USD eight billion in Chinese debt. Officials also fear that Sri Lanka is caught in what they describe as the "China [debt] trap, and once you are in it, it is very difficult to get out."

The limestone quarry in Puttalam belongs to the public sector Cement Corporation and is on lease to Holcim.

The government hopes that, if it successfully purchased the company, it can reduce the price of cement in the country.

Local press reports have said that apart from China, there are six other bidders -- from the UAE, Indonesia, Thailand and Sri Lanka.

Holcim Lanka's assets include two packing plants in Galle and Trincomalee, a cement plant in Puttalam and a cement grinding plant in Galle. (ANI with inputs)